iShares U.S. Home Construction ETF (ITB)

The company earlier reported bottom-line results which beat estimates, but the top line slightly missed.

FQ4 (ending Nov. 30) deliveries of 6,950 homes gained 23% from a year ago. New orders of 5,492 homes up 22%, up 24% in dollar terms. ASP of $329K vs. $307K a year ago. Incentives of 23.1K per home, or 6.6% of home sales revenue vs. $20.6K and 6.3% a year ago.

Backlogs of 5,832 homes up 21%, up 22% in dollar terms.

Gross margins of 25.6% fell 120 basis points from a year ago. Operating margin of 16% down 90 bps.

Demand in some of its markets deteriorated as Q4 progressed, says KB Home (KBH-12.6%) management on the earnings call, and gross margins in Q1 are expected to be down "significantly" from the year-ago level.

Pressed by analysts on the comments, management says it expects Q1 will be a low point for the year, with sequential improvement to follow. Not wanting to put too fine of a number on what it expects margins to be this year, management says achieving the 20% long-term target is unlikely.

Some homebuilders are red, some are green, but all are well off session highs in sympathy: Hovnanian (HOV-2.7%), D.R. Horton (DHI-2.3%), Toll Brothers (TOL+0.3%), PulteGroup (PHM-0.6%), Ryland (RYL+0.2%)

Bloomberg is reporting the president as set to announce a 50 basis point reduction in FHA fees to 0.85% at an event in Phoenix tomorrow. The news isn't good for private mortgage insurers who have been happily raking in market share gains at the expense of the government agency, but the homebuilders are a different story.

Among the more interesting is the idea of North Korea hackers attacking the infrastructure of the NYSE and Nasdaq, precipitating a gigantic one-hour drop in stocks.

Others include: 1) Significantly higher Apple (NASDAQ:AAPL) estimates, making it the first $1T market cap company, the best-performing large-cap in 2015, and a "must own." 2) Falling home prices in H2, making shorts of homebuilders (ITB, XHB) a good play 3) Bank stocks (NYSEARCA:XLF) have a hard time of it 4) Calling Twitter (NYSE:TWTR) his new Netflix, Carl Icahn amasses a sizable position, forcing a bidding war for the company between Google and Facebook 5) Google (NASDAQ:GOOG) becomes more shareholder friendly, cutting spending and launching a buyback program 6) Activists take aim at Cisco (NASDAQ:CSCO), forcing John Chambers out 7) Berkshire Hathaway (BRK.A, BRK.B) makes its largest-ever acquisition, and its not in consumer goods, but instead in energy, retail, or construction/equipment.

November new home sales at a seasonally adjusted annual rate of 438K were off 1.6% from the previous month, and also lower by 1.6% from a year ago.

A longer-term chart shows the current amount of new home sales to be at a level associated with the bottom of the deep recession of the early 1990s. There's also a pretty wide divergence between the confidence level of homebuilders (surging upward) and the path of new home sales.

It's a different story (at least for the stock price) with Hovanian (HOV+5.9%) after its earning report today. Management: "It's an understatement to say that the past 12 months have been choppy ... Given the gains we've seen in employment, we would have expected stronger home sales."

“There is a group of millennials that are waiting out there to jump into the market that do have the ability to repay,” say FHFA officials on a call announcing official approval of 97% LTV mortgages.

Fannie Mae (OTCQB:FNMA-2%), which has more experience with the program, is already accepting applications, but Freddie Mac (OTCQB:FMCC-2.1%) - newer to the product - is waiting until late March for full implementation.

The IPO market remains hot - 344 companies have filed to go public so far this year, the most in a decade - but not so for homebuilders. After eight builders raised $1.77B issuing new shares in 2013 and 2014's first half - the first IPOs since 2004 - the momentum has faded as the pace of new home sales remains sluggish.

“The public equity market right now is not an attractive place,” says Utah-based Woodside Homes chief Joel Shine. His company filed for an IPO in March, but instead decided to raise capital from existing investors and by issuing $50M of debt. The company in H1 posted sales roughly flat with that of a year ago.

Of the eight builder stocks gone public sine 2013, five - TPH, CCS, WLH, UCP, TMHC - now trade for less than their IPO prices, while two - NWHM, WCIC - are modestly higher. Only one - LGI Homes (NASDAQ:LGIH) - has significantly outperformed the S&P 500.

“Growing confidence among consumers is what’s fueling this optimism among builders,” says NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, DE. “Members in many areas of the country continue to see increasing buyer traffic and signed contracts.”

This month''s read of 58 is four points higher than October, and three points better than consensus estimates.

The index of current sales conditions rose five points to 62, while the index for futures sales gained two points to 66. An index gauging prospective buyer traffic added four points to 45.

Releasing preliminary FQ4 results ahead of a conference presentation, Toll Brothers reported sizable year-over-year sales gains both in terms of units and dollars. The ASP of homes delivered of $747K was up 6.3% from a year ago. The ASP of signed contracts in FQ4 of $757K was up 5%.

The share of occupied homes in which homeowners live fell nearly a full percentage point over the last year to 64.4%, says the Census Bureau, the smallest ratio since 1994. Alongside that number, naturally, the share of rentals that are vacant fell to its lowest since the mid-90s.

The story is a familiar one: Tight lending conditions and an anemic recovery coming alongside rising prices for entry level homes as institutional investors gobble up the available supply.

"Many builders indicated that they were having a more difficult time filling positions compared to one year earlier," says the Atlanta Fed in its Construction and Real Estate Survey. "A shortage of labor was noted across many trades, including masons, drywall hangers, framers, electricians, and plumbers."

The diffusion index on construction activity and the 90-day outlook fell to its lowest level since about the start of 2012 as a growing number of builders report activity as flat to slightly down.

As for buyer traffic, the report from brokers and builders was mixed, with those indicating a decline suggesting seasonal factors and a drop in buyer confidence as being the main factors behind the dip.

The iShares Dow Jones U.S. Home Construction Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Home Construction Index.
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